How I Earn 3x More Money From Stocks

“Dividend stocks” are stocks that pay a set amount of money back to shareholders on a regular basis, usually quarterly, but the regularity can vary. Some REIT’s (Real Estate Investment Trusts) for instance, pay a dividend monthly, such as AGNC.

Say you own 1000 shares of a company that has a total of 10,000 shares available for purchase (shares outstanding). You would own 10% of that company and would be entitled to 10% of their profits, assuming that are paying out a percentage equal to 10% return. Sometimes a company will pay their investors the profits as a Dividend, or they may simply reinvest back into the company, further increasing the company’s value/expansion.

Over time dividend stocks tend to outperform non-dividend paying stocks. There are a few theoretical reasons for this. Take a look at the chart below from Seeking Alpha

It’s pretty easy to see that you would have accumulated over 3.3x more money if you had invested in dividend stocks vs non-dividend paying stocks, over the long term. Dividend stocks don’t always beat non-dividend paying ones as pointed out in the SA article above. “In the 1990’s, low income-earning but high valuation companies shot past dividend paying stocks, but were later crushed when the tech bubble burst.”

The first major reason is that any company that is paying out a dividend to it’s shareholders is most likely actually making money and if a company has a long track record of paying or even increasing dividends every year, you know they are doing something right. Dividends are paid from profits and is a reward given to shareholders for helping the company grow (by buying shares). Almost all of the companies on the Dividend Aristocrats list (Companies paying & raising dividends for 25+Years) are ones you’d probably recognize as household names. Companies such as; Clorox, ExxonMobil, Coca-Cola, Proctor & Gamble, and Target. You can see that these are names that have stuck around through multiple recessions and market downturns. They have brand loyalty, a large moat (or barrier to entry), and consistent cashflow. If you’re like me, you want to pack your portfolio with names like these because when the inevitable happens and the markets go sour, these companies will be the ones to hold steadfast even in some of the worst economic conditions.

A second reason that dividend stocks tend to beat their rivals is that you are less likely to sell off shares of a company that’s paying you cash to keep them in your portfolio. It’s that simple. Div stocks provide less volatility during market crashes, but tend to grow at less of a clip during rapid market growth. If you are thinking that you should have a combination of dividend and non dividend paying stocks, you are probably right but I have seen people with portfolios of only dividend paying stocks and they seem to fair very well also. My preference is majority dividend paying stocks, with a selection of stocks that although may have higher volatility, have the potential to create huge returns. Think Amazon, which doesn’t pay a dividend at all, although I don’t own it personally.

I think a third reason dividend stocks outperform is the simple reason that companies will usually increase their dividend payouts as time goes on. Take a look at this example from HubPages, they have a simple chart to explain this.

EXAMPLE: Let’s say you are 25 years old and you start off with $10,000 to invest. You earn 5 % yield on your stocks, which pay a monthly dividend. These stocks also increase their dividends by 10 % each year (for example $1 per share paid in dividends becomes $1.10, $1.21, etc.). You invest for a 20 year period. You don’t add any more money to the account, and you choose to re-invest all of your dividends.

When you are 45-year-old, how much will your initial $10,000 be worth? $133,561.01. But it gets better. Remember in year 1, when you were earning 5 % or $500 a year in dividends? You are now making that each month! By year 20, you are now receiving $5,866.32 each year in dividends. You can choose to sell your stock or you can simply take your $488 monthly dividend and do what you please.